Health Maintenance Organization – Definition

Cite this article as:"Health Maintenance Organization – Definition," in The Business Professor, updated December 3, 2018, last accessed October 20, 2020,


Health Maintenance Organization (HMO) Definition

A health maintenance organization (HMO) is a public or private body of medical insurance providers that offers health insurance coverage in lieu of a fee. The insurance fee can be collected on a monthly or annual basis. The health maintenance organization limits coverage to medical assistance provided by health practitioners that are contractually tied to it. Mandating such contractual obligations has both its advantages as well as shortcomings ‚Äď while on one hand it facilitates discounts on premiums payable, on the other, it restricts the functioning of the members on its network.

A Little More on the Health Maintenance Organization

Every health insurance provider brings to the table a set of unique attributes and options that it offers to a prospective policy buyer. A health maintenance organization (HMO) typically offers to the prospective buyer the option to choose from a wide network of health practitioners that are contractually tied to it.

The HMO not only provides basic health services to its subscribers, but also offers them a wide range of supplemental healthcare amenities. It has an extensive network of medical health practitioners across specialties that it builds up via service contracts with health facilities and doctors, including both primary care physicians (PCP) and specialists. Such contracts mandate payment of a stipulated fee to doctors and health facilities by the HMO for their services to its subscribers. These contracts also make it possible for HMOs to offer discounts to its subscribers on the premiums payable.

Services Provided by an HMO to its Subscribers

While subscription to an HMO’s services limits coverage of its subscribers to healthcare received from contracted providers only, there are instances (especially emergencies and dialysis) when an insured can avail healthcare services from doctors or healthcare facilities outside of the HMO’s network and still expect coverage. It is also usually mandatory for subscribers to live or work at locations within the HMO’s coverage area. In instances where a subscriber needs to avail emergency medical attention outside the HMO’s coverage area, the HMO is bound to reimburse all expenses incurred.

The subscribers of an HMO are relieved from having to pay any deductibles out of their pockets; instead they are required to pay a nominal fee, called a co-payment for each visit to a doctor or medical facility.

It is also obligatory for the insured to opt for a primary care physician (PCP) who is contractually tied to the HMO. The HMO also makes it mandatory for its subscribers to seek their PCP’s referral for visits to any specialists within the purview of their healthcare coverage. In cases where a subscriber’s PCP leaves the HMO network, he/she is assigned another PCP within the HMO’s network.

Advantages of having a health maintenance organization in place are twofold. On the one hand, the HMO provides time-tested and well-managed healthcare plans to the employees of an organization. On the other, it assures a continuous supply of patients to healthcare providers under the HMO’s network.

References for Health Maintenance Organization

Academic Research on Health Maintenance Organization (HMO)

Racial differences in sarcoidosis incidence: a 5-year study in a health maintenance organization, Rybicki, B. A., Major, M., Popovich Jr, J., Maliank, M. J., & lannuzzi, M. C. (1997). American journal of epidemiology, 145(3), 234-241. This study focuses on sarcodosis with regards to racial differences. The paper analyses different human races, and shows their percentage risk of this condition. The subjects taken into account were aged 29-60 years old, and comprised 5% of the Detriot population. The study confirms the higher occurence of sarcodosis in African Americans when compared to Caucasians. The paper aims to serve as a future reference for researchs to be carried out on sarcodosis.

How do¬†financial¬†incentives affect physicians’ clinical decisions and the¬†financial performance¬†of¬†health maintenance organizations?, Hillman, A. L., Pauly, M. V., & Kerstein, J. J. (1989). New England journal of medicine,¬†321(2), 86-92. This paper tests the belief that the use of financial incentives by health maintenance organizations (HMOs) may change physicians‚Äô behaviour toward individual patients, by using a regression analysis of data from a survey of HMOs to examine the relation between the presence of financial incentives and two measures of the use of resources, and one measure of the HMOs’ financial viability. The paper concludes that the use of some, but not all, financial incentives, as well as the type of HMO, does influence the behavior of physicians toward patients.


Health maintenance organizations,¬†financial¬†incentives, and physicians’ judgments, Hillman, A. L. (1990). Annals of Internal Medicine,¬†112(12), 891-893. This paper suggests that health management organizations (HMOs) make use of financial incentives in influencing physician‚Äôs clinical decisions. The paper poses the question of whether financial incentives affect physicians’ decisions, and whether some financial incentives distort physicians’ judgment. It also checks if in the pursuit of cost-effective medicine, whether some HMO incentives influence doctors to conserve medical resources.


Structure and performance of health maintenance organizations: a review, Langwell, K. M. (1990). Health Care Financing Review, 12(1), 71. This paper explores the degree of growth of HMOs and analyses their impact on today’s health market growth. The paper examines 236 HMO’s which served over 9 million members in 1980. It also analyses about 591 HMOs with over 34 million enrollees in 1989.The article reviews evidence on the relationship between HMO organizational arrangements and performance, and the trends within the HMO industry toward new organizational structures. The implications for Medicare and Medicaid risk contracting are also examined.


Organization size and failure among health maintenance organizations, Wholey, D. R., Christianson, J. B., & Sanchez, S. M. (1992). American Sociological Review, 829-842. This paper extends the organizational ecology literature by examining the relationship between organization size and failure. Contrary to the typical monotonically declining relationship between organization size and failure rates found in ecology research, this paper shows that this relationship varies by type of organization. Using data from censuses of Health Maintenance Organizations in the United States, the paper finds that the relationship assumes an inverted U-shape for one type of HMO and a monotonically declining shape for another type of HMO.


The performance of health maintenance organizations: an analytic review, Wolinsky, F. D. (1980). The Milbank Memorial Fund Quarterly. Health and Society, 537-587. An analytic review of the literature on HMO performance reveals common limitations that make available evidence inconclusive, at best. Most studies have been more descriptive than analytic; others are characterized by serious deficiencies in methodology. Although several observations about the effects of HMOs appear frequently, the causes are not known. Four hypotheses concerning performance are advanced for further exploration.


Scale and scope economies among health maintenance organizations, Wholey, D., Feldman, R., Christianson, J. B., & Engberg, J. (1996). Journal of health economics, 15(6), 657-684. This paper examines scale and scope economies among Group and IPA Health Maintenance Organizations (HMOs) over the period 1988 to 1991 using a national sample of HMOs. This paper shows that HMOs benefit from scale economies. It also suggests that group  HMOs in more competitive markets have lower costs but IPA costs are not affected by competition.


Performance measurement criteria in health care organizations: Review and future research directions, Li, L. X., & Benton, W. C. (1996). European Journal of Operational Research, 93(3), 449-468. This paper attempts to review the performance of health care following the preent lowering of cost, and the increase of health care quality in recent years. The paper focuses on cost conatinment, and paves a ground for further research by practitioners and researchers.


Profits under pressure: The economic performance of investor-owned and nonprofit health maintenance organizations, Schlesinger, M., Blumenthal, D., & Schlesinger, E. (1986). Medical Care, 615-627. This study assesses the economic performance of investor-owned and private nonprofit health maintenance organizations by comparing their costs and revenues, controlling for other characteristics of the plans, and the areas in which they are located. Data are drawn from a sample of 173 HMOs operating in 1983. The paper shows that for-profit plans have higher costs when compared to non-profit plans, and that average revenues are higher in investor-owned HMOs. The paper concludes with a discussion of the implications of these findings for both the future performance of the HMO industry and public policy affecting prepaid health care.


Using prior utilization to determine payments for Medicare enrollees in¬†health maintenance organizations, Beebe, J., Lubitz, J., & Eggers, P. (1985). Health Care Financing Review,¬†6(3), 27. This article examines how the Tax Equity and Fiscal Responsibility Act of 1982 has made it possible for health maintenance organizations (HMO’s) to participate in the Medicare program on an at-risk basis, where payment to at-risk HMOs are based on a formula known as the adjusted average per capital cost (AAPCC). The article further describes the current formula and discusses a modification, based on prior use of Medicare services, that endeavors to more accurately predict risk, as well as highlight limitations of a prior-use model and areas of research.


Pricing And Performance In Health Maintenance Organizations, Conant, J. S., Mokwa, M. P., & Burnett, J. J. (1989). Marketing Health Services, 9(1), 25. In this national study of HMOs marketing directors, the relationships between strategic management style and the relative importance of pricing in competitive marketing strategy are examined. The effectiveness of price strategy planning, and financial performance are also examined. The findings indicate that HMOs practicing effective price planning also perform well on an overall basis. Insight into the content and substance of HMO pricing strategies is also provided.

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